The US rate of profit 1948-2015

The US Department of Commerce’s Bureau of Economic Analysis (BEA) has just updated its estimates of net fixed capital stock in the US economy. This gives us the opportunity to measure the US rate of profit a la Marx up to 2015.

I made such measurements up to 2014 in a previous post about a year ago. Last December, I summed up the conclusions from the data. “First,the secular decline in the US rate of profit since 1945 is confirmed and indeed, on most measures, profitability is close to post-war lows. Second, the main cause of the secular fall is clearly a rise in the organic composition of capital, so Marx’s explanation of the law of the tendency of the rate of profit to fall is also confirmed. Third, profitability on most measures peaked in the late 1990s after the ‘neoliberal’ recovery. Since then, the US rate of profit has been static or falling. And fourth, since about 2010-12, profitability has started to fall again. Finally, the fall in the rate of profit in the US has now given way to a fall in the mass of profits.”

The conclusions reached last year are pretty much unchanged. In last year’s post, I updated the rate of profit as measured using the assumptions and methods of Andrew Kliman in his book,The failure of capitalist production. AK measures the rate of profit for the corporate sector only and uses the historic cost of net fixed assets as the denominator. I also used a slightly different variation of AK’s approach in depreciating profits by current costs, while maintaining a historic cost measure of fixed assets. If all this sounds technical, it is and I refer you to the already cited papers and posts for an explanation. See Anders’ manual too. And there is special appendix in my new book, The Long Depression, on measuring the rate of profit.

Anyway, the results for the US corporate rate of profit look like this.

In AK’s measure the US corporate rate of profit falls from the late 1970s to a trough in 2001 and then it appears to make a recovery. But it could be said that the US rate of profit was more or less stable from the late 1980s. My slightly revised measure reveals a very steady decline until a stabilisation from the 1980s – or the traditional ‘neoliberal period’. Both measures suggest that the US corporate rate of profit has been at least static (with cyclical fluctuations) since 1997. Either way, the US corporate rate of profit is some 30% below where it was after WW2 and 20% below the 1960s.

However, I prefer as a better guide to the health of a capitalist economy to look at the total surplus value created in an economy against the capital employed, thus following Marx’s basic formula, s/c+v. So I have a ‘whole economy’ measure using total national output, fixed assets and employee compensation for variable capital. The graph below shows the results updated to 2015 for this measure, using either historic or current costs to value fixed assets.

This shows that the overall US rate of profit has four phases: the post-war golden age of high profitability peaking in 1965; then the profitability crisis of the 1970s, troughing in the slump of 1980-2; then the neoliberal period of recovery or at least stabilisation in profitability, peaking more or less in 1997; then the current period of volatility and slight decline. The historic cost measure differs from the current cost measure in that the trough in profitability is actually at the end of the 1980s, as in Kliman’s measure. And the current cost measure always shows much greater upward or downward movement.

What is interesting about the update of data to 2015 is that it reveals that, whatever measure is used, the rate of profit in 2015 is lower than in 2012; lower than in 2006 (the peak of the last cycle); and lower than in 1997 when most measures peaked. So there is currently a downward phase in the rate of profit. Given the fall in the mass of profit during this year, we can expect to see a further decline in 2016. I’ll return to this point later when we look at the measures of profitability provided by the US Federal Reserve.

We can sum up the movements in the rate of profit as follows: (1 = base point)

1948-65

1965-82

1982-97

1997-15

1948-15

2006-15

HC

0.78

0.79

1.10

0.97

0.67

0.93

CC

0.93

0.64

1.30

0.97

0.75

0.96

So between 1948 and 2015, the US rate of profit declined between 25-33% depending on whether you measure fixed assets in historic (HC) and current costs (CC). Between 1965 and 1982, the rate fell 21-36%; but from 1982 to 1997 it rose 10-30%; but since 1997 it is down 3% and 4-7% from 2006.

And each economic recession in the US starting from the first large one in 1974-5 has been preceded by a fall in the rate of profit at least one year and often up to three years before. (1= base point)

1973-5

1978-82

1988-91

1997-01

2006-9

HC

0.95

0.84

0.92

0.89

0.81

CC

0.87

0.80

0.93

0.91

0.79

Last year, I compared the change in the rate of profit to changes in the organic composition of capital (fixed assets divided by employee compensation) and the rate of surplus value (profits divided by employee compensation). I did this again for 2015 and it confirms Marx’s law of profitability, namely when the organic composition of capital rises faster than the rate of surplus value, the rate of profit will fall and vice versa.

Over the whole period, 1946-15, the rate of profit fell 30% (historic cost measure), while the organic composition of capital rose 46% and the rate of exploitation rose 2%.

The US Federal Reserve also provides data from which we can glean an estimate of the US rate of profit and on an even more up to date basis (to mid-2016). However, the Fed measure only covers the non-financial corporate sector and only goes back to 1960. The Fed measure, a la Marx, is the net operating surplus (profit) over non-financial assets and employee compensation. It broadly confirms the long-term trends revealed in the whole economy measure.

More interestingly, the Fed measure shows that the rate of profit for non-financial companies has fallen since 2012 and particularly since 2014.

So, as I said at the start of this post, the main conclusions from last year remain. What the 2015 measures add is that the US rate of profit (on any measure) fell in 2015 and is now down about 3% from 2012. US corporate profits are falling in absolute terms and have been since early 2015.

The US rate of profit is likely to have fallen again this year and that fall is accelerating according to the more high frequency Fed data.

15 Responses to “The US rate of profit 1948-2015”

The non so steep fall in the rate of profit might mean the transfer of surplus from third world countries due the moving of industries out of US. Though C might increase in value due the higher prices of means of prodcution in US, the commodities have long chains of productions, in the assembling of such products, outside it. So, there is a sum of foreign surplus value.

The problem here is that the organic composition of capital is not measured just against the fixed capital stock, but against the whole of the advanced constant, i.e. the fixed and circulating capital.

As Marx sets out in Capital Volume II, and in even greater detail in Theories of Surplus Value, the bourgeois determination of the value of national output is false. It is based on what Marx calls Adam Smith’s “absurd notion” that the value of commodities, and equally therefore, the entire commodity-capital, can be dissolved entirely into revenues – wages, profits, rent, interest (and taxes).

But, as Marx describes, it clearly cannot. These revenues, equal to GDP, are only equal to the new value created by labour during the year, i.e. to (v+s), whereas the actual value of output is equal to c+v+s. A large and growing part of the value of total output consists of the circulating constant capital, i.e. raw and auxiliary materials, plus wear and tear of fixed capital.

Yet, all of this element is omitted from the GDP figures of capitalist economies, which are compiled on the basis of value added. The delusion is created in these figures, as Marx shows in his destruction of Smith’s “absurd notion”, because they contain the element of value represented by “intermediate production”. But, as Marx demonstrates this value of intermediate production, is only the element of new value created by labour in Department I, and exchanged for consumption goods from Department II.

As Marx sets out in Capital Volume II in relation to simple reproduction.

Here intermediate production that appears in the value of final production (GDP) is equal to the 2000 c in Department II, but this is only equal to Department I (v+s).

If we total National Income here, which is what capitalist economies equate with the value of national output or GDP, it is 2000 in Department I, and 1,000 in Department. The total value of the final output from Department II certainly does as Smith says resolve into the factor incomes (v + s).

But, as Marx points out, this value of final output equal to National Income is, in fact, only equal to the value of the consumption fund, and not equal to the value of total output.

The value of National Income or GDP here, in Marx’s example is 3000, but as his model shows the total value of output is 7,000, because 4,000 of total output is never traded, and forms no income for anyone, it is simply an exchange of capital with capital, a portion of value equal to circulating constant capital (materials plus wear and tear of fixed capital) entering the value of current production, and an equal value being withdrawn from production to reproduce the consumed constant capital.

In fact, one would expect that as the proportion of fixed capital used in production rises, and especially as that fixed capital becomes more productive as technology improves, that the amount of circulating constant capital processed would rise sharply as against the mass of fixed capital – which is what Marx states in Capital III, Chapter 6, must happen – because this is the very basis of rising social productivity, and the rise in the organic composition of capital.

But, equally, as Marx describes that process whilst bringing forth a rise in the mass of constant capital laid out, that rise in social productivity causes the rate of turnover of capital to rise so that a smaller proportion of capital is advanced, causing the general annual rate of profit to rise, even as the rate of profit/profit margin may fall.

Because the GDP figures are only figures for new value added, and omit the actual value of circulating constant capital value contained in total output the rate of profit figure calculated against the fixed capital stock is not only wrong, but it misses out the main point that Marx was making about the relation between fixed and circulating capital, the rising social productivity, and changes in the rate of turnover of capital.

It is essentially a rate of surplus value – and not even an annual rate of surplus value – rather than a rate of profit, modified only by measuring it against the fixed capital stock. On that basis its a wonder that the rate of profit is not shown to have fallen even further, because it increases the value of c as a consequence of the accumulation of fixed capital, but does not reflect the concomitant changes in social productivity which that fixed capital engenders, and its effect both on the value of circulating capital, and on the rate of turnover!

Moreover, it is a confused amalgam even in relation to a rate of profit. Marx calculates the general annual rate of profit on the basis of the advanced capital, i.e. the value of the whole fixed capital stock, plus the value of the circulating capital advanced for one turnover period. Whilst the fixed capital stock is used here, the other data relates not to the advanced circulating capital for one turnover period, but the whole of the laid out variable capital during the year – there is also the mistaken belief, as described above, that the value of the circulating constant capital is also included.

So, what is produced is a mish-mashed combination of Marx’s Rate of Profit s/(c+v), or profit margin, which is the relation between the realised profit during the year, as a proportion of the laid out capital, or cost of production (c + v), or k, and his General or Average Annual Rate of Profit, which is based not on the laid-out capital or cost of production, but the advanced fixed and circulating capital for one turnover period.

On top of that to compound matters, as stated above the data as with all bourgeois national output data omits the value of the constant capital consumed in production.

For clarification the definitions of Rate of Profit, Annual Rate of Profit, General or Average Annual Rate of Profit, and associated concepts such as Rate of Turnover of Capital, Fixed Capital, Circulating Capital, Price of Production and The Law of The Tendency For The Rate of Profit To Fall, are contained in my Glossary of Marxist Terms.

In brief for the discussion here, Marx sets out in Theories of Surplus Value that when he is referring to the “Rate of Profit”, in relation to the LTRPF he is talking about the laid-out capital, an not the advanced capital.

“{Incidentally, when speaking of the law of the falling rate of profit in the course of the development of capitalist production, we mean by profit, the total sum of surplus-value which is seized in the first place by the industrial capitalist, [irrespective of] how he may have to share this later with the money-lending capitalist (in the form of interest) and the landlord (in the form of rent). Thus here the rate of profit is equal to surplus-value divided by the capital outlay.”

(TOSV, Chapter 16)

He also describes it this way in Capital Volume III, the capital outlay is there explained as the cost of production, k, which is equal to c + v, or more precisely c + d + v, where c is the value of the circulating constant capital (raw and auxiliary materials), d, is the wear and tear of fixed capital, and v is the amount paid out as wages. As marx makes clear, in calculating this rate of profit, on which the LTRPF is based, the value of fixed capital stock is not included, because it does not comprise a part of the cost of production of the output during the period under consideration.

For any particular capital, it is only the wear and tear of its fixed capital that comprises a part of its cost of production. For the total social capital that also applies, and is reflected in the fact that the part of its total output that must be reproduced to replace fixed capital is only that needed to replace the portion of the fixed capital stock which has actually worn out, which as Marx describes in Capital II, is approximately equal to the total value of the fund for wear and tear.

By contrast, the Annual Rate of Profit is based on the total surplus value produced in a year, measured against the total advanced capital for one turnover period. Unlike the cost of production, the advanced capital, the capital which must be advanced for that turnover period does include the whole fixed capital stock, but does not include the wear and tear of that fixed capital, which would, in any case, be double counting.

But, in addition to the total fixed capital, the advanced capital for a turnover period only includes the value of the circulating capital advanced for that period, and not the total laid-out circulating capital for the whole year.

As Marx describes in Capital III, Chapter 6, therefore, as more and better fixed capital is employed, which raises the level of social productivity, the proportion of wear and tear of fixed capital, along with the value created by labour (v + s), declines as a proportion of the total value of output, whereas the value of materials (circulating constant capital) rises, and this is the basis of the rising organic composition of capital, and falling rate of profit (s/c + d + v), as the volume of output rises.

But, that same process raises the level of the annual rate of profit, because although the quantity of fixed capital increases, the efficiency of this fixed capital rises as a result of technological development (one machine replaces two old machines, which is the basis of moral depreciation), and for the same reasons that value of that fixed capital per unit of fixed capital, tends to fall, because it is itself produced more efficiently.

But, more significantly, this rise in social productivity means that the rate of turnover of capital rises, so that the advanced circulating capital declines relative to the value of output and surplus value, causing the annual rate of profit to rise. As Marx describes in Capital III, and at more length in Theories of Surplus Value Part II, there are two things which affect the annual rate of profit of any individual capital relative to the General Annual Rate of Profit.

If the organic composition of capital of any particular branch of capital is lower than the average its annual rate of profit will be higher than the average, and if its rate of turnover of capital is higher than the average, its annual rate of profit will also be higher than the average. So, Marx outlines, where a branch of industry has a lower than average composition of capital, its prices of production will be lower than their exchange values, and similarly where a branch of industry has a rate of turnover that is higher than the average its prices of production will also be lower than their exchange values.

By this means, the general or average annual rate of profit is equalised. But it is also for this reason that the annual rate of profit and the rate of profit will tend to move in opposite directions. As productivity rises, and the value of commodities, including those commodities that comprise the constant and variable decline declines, so also the rate of turnover will tend to rise, because this is also the consequence of utilising more and better fixed capital. The consequence of this is to raise the general or average annual rate of profit.

The same process, however, raises the organic composition of capital, as the value of material as a proportion of total output rises – which may or not be offset by falling values of commodities, which outweigh the rise in mass of consumption of those commodities – which causes the cost of production, k, or c + d + v, to rise relative to the new value created, which thereby causes a falling rate of profit/profit margin.

“the capital which must be advanced for that turnover period does include the whole fixed capital stock, but does not include the wear and tear of that fixed capital, which would, in any case, be double counting.”

Boffy, I am interested, why is this double counting, can you explain this point please.

The cost of production includes the wear and tear of fixed capital, because that goes into the value of output and is reproduced from that output, and stored in a fund for the replacement for the fixed capital at the point it is worn out. In the same way, standard accounting practice, the depreciation of fixed capital each year is included in a firm’s Profit and Loss Account, as a cost of production.

In a firm’s accounts, the amount paid for the fixed capital, however, does not appear in the Profit and Loss Account, it is a capital expenditure, and appears in the firm’s Balance Sheet, shown as a deduction from the firm’s Bank Account (Current Assets) and addition to its Fixed Assets.

When Marx calculates the annual rate of profit he uses the total fixed capital amount. For example, suppose, a firm employs a new machine with a value of £1,000, which is estimated to last for ten years, and thereby gives up £100 of value to output each year as wear and tear.

In Capital III, Marx explains that to calculate the annual rate of profit it is the total fixed capital amount that is used, because all of this capital must be advanced for production to take place. In other words, the firm cannot just advance a tenth of the capital represented by the machine, but must advance the whole machine.

Suppose the firm’s circulating capital amounts to £1,000 and turns over once during the year, and we can say this breaks down into £800 for materials and £200 for wages, with a 100% rate of surplus value. In that case, the annual rate of profit is:

£1000 machine + £800 materials + 200 wages = £2,000 advanced capital.

Profit = £200, giving an annual rate of profit of 10%.

The rate of profit here, however, is k + p, which is also s/c + d + v, because k, the cost of production is equal to the laid out circulating capital c + v, plus the wear and tear of the fixed capital.

So, c 800 + d 100 + v 200 = k = 1100.

Profit s = p = 200.

So, the rate of profit is 18.18%.

Now, it can be seen why in calculating the annual rate of profit you cannot include both the total value of the fixed capital, i.e. the machine of £1,000, and the wear and tear of that same machine (£100), because it would be double counting this £100 of wear and tear of the machine, which is already included in the original value of the machine of £1,000.

“The rate of profit here, however, is p/k, which is also s/c + d + v, because k, the cost of production is equal to the laid out circulating capital c + v, plus the wear and tear of the fixed capital.”

“The Fed measure, a la Marx, is the net operating surplus (profit) over non-financial assets and employee compensation. It broadly confirms the long-term trends revealed in the whole economy measure.”

This point is also clearly wrong a la Marx, for the reason described in Marx’s statement above:

“…when speaking of the law of the falling rate of profit in the course of the development of capitalist production, we mean by profit, the total sum of surplus-value which is seized in the first place by the industrial capitalist, [irrespective of] how he may have to share this later with the money-lending capitalist (in the form of interest) and the landlord (in the form of rent).”

If you do not include the amount deducted from surplus value as rent, interest, and taxes then you have not calculated a Marxian rate of profit. Moreover, as Marx sets out in discussing Commercial Profit, that includes not only the profit made by merchant firms selling commodities, and thereby sharing equally in the surplus value produced by productive-capital, but also includes all of those financial companies engaged as “money-dealing capital”, as opposed to being money-lending capital.

Given the increase in profits of commercial capitals, including of such money-dealing capital, and given the increase in rents of all kinds the omission of all of the surplus value that has been increasingly drained into such channels would seem to be a very serious understatement of the mass of surplus value produced a la Marx, and, therefore, of any calculation of any kind of rate of profit a la Marx.

Reblogged this on Reconstruction communiste Québec and commented:
More interestingly, the Fed measure shows that the rate of profit for non-financial companies has fallen since 2012 and particularly since 2014.
So, as I said at the start of this post, the main conclusions from last year remain. What the 2015 measures add is that the US rate of profit (on any measure) fell in 2015 and is now down about 3% from 2012. US corporate profits are falling in absolute terms and have been since early 2015.

The US rate of profit is likely to have fallen again this year and that fall is accelerating according to the more high frequency Fed data.

“The only thing I’d add is that wealth or capital accumulation, as measured by real GDP.”

Actually, no. GDP, or National Income/Expenditure, as Marx sets out in Capital II, III and in Theories of Surplus Value, is only a measure of the expansion of revenues, i.e. wages, profits, rent and interest. It is a measure thereby only of society’s consumption fund which is bought with those revenues.

The portion of national output, as opposed to national income/expenditure which is attributable to the value of constant capital carried forward into current production, and likewise taken out of current production is not included in the GDP figures, and the idea that it is, as Marx sets out is the absurd notion of Adam Smith, that subsequent economists inherited from him.

“The value of the entire portion of the product which is consumed as revenue in the form of wages, profit and rent (it is entirely immaterial whether the consumption is individual or productive), indeed, completely resolves itself under analysis into the sum of values consisting of wages plus profit plus rent, that is, into the total value of the three revenues, although the value of this portion of the product, just like that which does not enter into revenue, contains a value portion = C, equal to the value of the constant capital contained in these portions, and thus prima facie cannot be limited by the value of the revenue.” (Capital III, Chapter 49)

“Viewing the income of the whole society, national income consists of wages plus profit plus rent, thus, of the gross income. But even this is an abstraction to the extent that the entire society, on the basis of capitalist production, bases itself on the capitalist standpoint and thereby considers only the income resolved into profit and rent as net income.

On the other hand, the fantasy of men like Say, to the effect that the entire yield, the entire gross output, resolves itself into the net income of the nation or cannot be distinguished from it, that this distinction therefore disappears from the national viewpoint, is but the inevitable and ultimate expression of the absurd dogma pervading political economy since Adam Smith, that in the final analysis the value of commodities resolves itself completely into income, into wages, profit and rent.” (ibid)

“The value of the entire portion of the product which is consumed as revenue in the form of wages, profit and rent (it is entirely immaterial whether the consumption is individual or productive), indeed, completely resolves itself under analysis into the sum of values consisting of wages plus profit plus rent, that is, into the total value of the three revenues, although the value of this portion of the product, just like that which does not enter into revenue, contains a value portion = C, equal to the value of the constant capital contained in these portions, and thus prima facie cannot be limited by the value of the revenue.” (ibid)

“One may therefore imagine along with Adam Smith that constant capital is but an apparent element of commodity-value, which disappears in the total pattern. Thus, a further exchange takes place of variable capital for revenue. The labourer buys with his wages that portion of commodities which form his revenue. In this way he simultaneously replaces for the capitalist the money-form of variable capital. Finally: one portion of products which form constant capital is replaced in kind or through exchange by the producers of constant capital themselves; a process with which the consumers have nothing to do. When this is overlooked the impression is created that the revenue of consumers replaces the entire product, i.e., including the constant portion of value.” (ibid)

“… it is thereby overlooked 1) that one value portion of the product of this labour is no product of this new additional labour, but rather pre-existing and consumed constant capital; that the portion of the product in which this part of value appears is thus also not transformed into revenue, but replaces the means of production of this constant capital in kind; 2) that the portion of value in which this newly added labour actually appears is not consumed as revenue in kind, but replaces the constant capital in another sphere, where it is transformed into a natural form, in which it may be consumed as revenue, but which in its turn is again not entirely a product of newly added labour.” (ibid)

Impressive work, Michael. I am very happy that there are still some who seriously study marxist political economy and seek to bring it to bear on current events. Some fundamental issues on this keep irking me, however.

First off, there is a plethora of measurement issues at hand, given ia that the very concept of value is different from Marx’. Marx derived his concept of value from Labour, whereas the current national statistics start off several layers of abstraction away, by looking at monetary price levels (note that after the transformation from value into prices, the return rate of capital is equalized – but this is basic stuff that I don’t need to tell you). Adding to this, the levels measured in the statistics are compiled from corporate tax returns and the valuation is thus further skewed by various regulations on depreciation, measurement etc. These rules are by nature subjugated to political changes that wreak havoc on longer time series… and it gets worse still: If you follow Kliman et al and limit the analysis to production you are of course accepting the statistic’s definition of which enterprises should be seen as production enterprises. Given that we have seen more than a century of vertically and horizontally integrated enterprises, this makes little sense. The relation between the government sector
and production is also kind of murky. Any theory of monopoly also dictates that monopolies leech profits from other enterprises, so constricting oneself to production in the age of financialization makes for a rather academic enterprise.
All in all, your attempt at calculating the rate of profit for the US in toto is the right way to go. Unless of course you consider foreign trade and finance relations to have any bearing on the US economy.

Second, you state in your post that the data confirm Marx’ theory of the falling tendency of the profit rate. Here, I am at a loss as to why is should need confirmation – not because (as Lenin says) Marx’ teachings are almighty since they are correct, but because the tendency is easily derived as a mathematical result of the profit formulae! So, I suppose, what you are intending to do is to demonstrate that while we know that 2+2=4, you can point out the two’s in the national statistics. I refer to my comments above.

Third, it is clearly your intent to use the computed data to describe and interpret current events. Here, however, I am also somewhat stumped. Given that capitalism even in the basest of Marxian descriptions has its investments driven by expected profits and no real limits on it monetary supply, it is no matter to foretell economic crises, wild booms and busts. Given the evolved state of the world, some further notions – in my opinion – crucial to a marxian analysis: globalization of monopolies (the last thirty years have seen the emergence of global monopolies/oligopolies in key sectors), the massive change in the class struggle’s balance of power that flowed from the collapse of the soviet union and the developments of the international power struggles that have taken place in the last 30 years. Lastly the “financialization phenomenon” – massive capitalization and borrowing – needs to be looked into and better understood, even though its statistical impact is already drastic. It bears mentioning that financialization is of course international by nature. Surely, concentrating on the US economy and excluding any influence from the rest of the world must be somewhat myopic. If in doubt, just ask any US citizen where all the jobs went!

Thus, the focus of your analysis on the longer term developments in US economy – from second world war to today – is the right way of using the data. That the data seem to confirm the current discourse on the secular stagnation of the economy is very interesting, so I shall be happy to see the data in comparison with data from other countries.

Since the decline of the rate of profit is of relatively little interest (no pun intended) in itself – where will it fall to? then what? – an analysis of the role of international trade, investment and development on the rate of profit (and no less on Labour productivity and wages) must be called for. This will of course also be of interest for those calling for political action (and both Brexit and the election of mr. Trump speak to a massive popular interest in these matters – and also to a need to formulate real alternatives to current policies).